Indicting Prepaid As a Whole; Despite Specific Evidence to the Contrary

In a recent article, “The Coming Wave ofNon-Credit Cards” Time Magazine introduces its readers to the newAmerican Express Reloadable Prepaid Card that delivers a freetransactional card account to everyone as long as they only use theATM once a month.

It’s unfortunate that often, the mainstream media fails to takethe time to understand the cost, risk, and complexity of offeringan open-loop prepaid card program. Due to this lack ofunderstanding inaccurate information can be reported and pot shotsare sometimes taken at the industry – even on a product asaffordable as the new American Express prepaid card.

For example, the author of this article selects incorrect newsfrom a variety of sources about a variety of products,overshadowing the benefits of this game changing offering.

“We predicted that more major financialinstitutions would launch prepaid debit cards in response to thecombination of increased regulation and a ballooning number ofpeople who can’t get a credit or debit card. American Express isthe first marquee credit card name out of the gate with the debutof its reloadable prepaid card.

This one is a little different from many other prepaid offeringscurrently on the market in that it doesn’t really seem set up to bea substitute for a bank account; for instance, you can only have amaximum of $2,500 on the card, and loading cash onto it is acumbersome process. AmEx tells The New York Times it plans to letcustomers load the card via direct deposit in the future, but fornow, the easiest way to load funds onto the card is online, via anexisting checking account.

AmEx is touting its relative lack of fees as a selling point,aware that consumers – and lawmakers – are starting to get wise tothe death-by-paper-cuts parade of $1 or $2 fees many prepaid debitcards carry. Five of the industry’s largest prepaid companies -First Data Corp, Green Dot Corp., Account Now Inc., NetSpend Corp.,and Unirush Financial Services LLC – have until next Monday toprovide information to Florida’s Attorney General, according toReuters. The state is investigating the companies for deceptive andunfair business practices centering around inadequate ornondisclosure of fees. Two of the companies are also beinginvestigated for claims that their products can help people raisetheir credit scores (they can’t).

Statements, as those above, findsuppliers guilty. American Express delivers an electronic versionof “free checking” for every American, a goal thought impossible,and yet they remain a target for criticism:“Clearly, excessive fees are a problem when it comesto prepaid debit cards, but there’s an even bigger reason forconsumers to be wary of this and the many other bank-backed prepaidcards we predict will hit the market in the coming months: The lawsthat protect you if your credit or debit card is used fraudulentlydon’t extend to prepaid cards. While an individual issuer can offercustomers zero liability, that’s wholly at their discretion and canbe rescinded at any time.

In addition, the FDIC insurance that protects your money in theevent of a bank failure isn’t guaranteed with prepaid debit cards.If the institution that issued your prepaid debit card declaresbankruptcy, whether or not you have a prayer of ever seeing thatmoney again depends on how the company organized its customers’funds. If the money is pooled into an aggregate account, a commonoccurrence, consumers could lose the right to reimbursement. A 2010Consumers Union report warns, “Some of the fine print by cardissuers tell consumers that the money is not insured,” but it’s notalways easy for cardholders to make this determination.”

The author has confused Zero Liability, anetwork offering, with Regulation E, which is a bank regulatoryrequirement. Regardless which one the author is discussing, it israrely as easy as described here for a protection to be removedfrom a cardholder.

Networks defend their brand with vigor, and every network approvesall marketing collateral and Terms & Conditions before it willallow a prepaid program to be released. No prepaid program managercan decide on a whim to no longer support Zero Liability or otherprotections they once offered. If a program manager wants to changeexisting terms and conditions, they must complete a networkre-review. If the changes are significant, the networks typicallyrequire the program manager to operate two portfolios. The initialportfolio must remain unchanged to support existing customers underthe old terms. The program manager can then open a new portfoliousing the new terms, but to move all existing cardholders to thenew terms, the program manager must re-issue all the cards – whichwould both alert the cardholder to the new terms and conditions andcost the program manager a lot of money.

The author’s last misplaced complaint is this:

“What’s more, unlike credit or debit cards connectedto a deposit account, the prepaid ones won’t help you establish orstrengthen your credit history, which could hurt your chances toget a loan or open a bank account in the future. This is the othermajor beef I have with prepaid debit cards. They relegate users tosecond-class status and don’t give them any kind of on-ramp to thefinancial mainstream.”The authorseems to be unaware that only timely payment of credit will impacta credit score, and so DDA accounts and prepaid accounts areirrelevant to her argument. DDA activity is only reported to creditagencies when significant negative events take place, so a prepaidcardholder loses nothing in credit reporting when adopting aprepaid account over a DDA.

While there may be bad actors in the prepaid market, as in everyother large market, American Express sure isn’t one of them. TheAmerican Express prepaid card will have a huge impact on themarket. It will drive price points lower and drive service levelshigher for all prepaid products – and every prepaid consumer willbenefit by shopping around.

During the past twelve months there has been an ongoing acceleration in the pace of collaborative efforts on the part commercial banking institutions, networks and various fintech entities, to provide…

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